Gold price (XAU/USD) continues to attract bids ahead of the Federal Reserve (Fed) interest rate decision, which will be announced on Wednesday. The yellow metal extended its three-day winning spell on Tuesday as the Fed is expected to maintain the status quo on the grounds of falling inflation and an upbeat economic outlook.
Investors remain curious about the guidance on interest rates as a hawkish outlook would trigger a risk-aversion theme. Markets are pricing in that the Fed is done with hiking rates until year-end, and hopes for the US economy shifting on a “golden path” are high. The only factor that could keep expectations of one more interest rate increase is rising energy prices, which may contribute to inflation and further squeeze households’ real incomes.
Gold price resumes its three-day winning spell as the Fed is expected to keep the monetary policy unchanged on Wednesday. The precious metal is at a two-week high at around $1,935.00 after discovering buying interest near the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The yellow metal has climbed above the 20-day and 50-day EMAs, which indicates that the short-term trend has turned bullish.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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